Credit trading

While the credit market gives investors a chance to invest in corporate or consumer debt, the equity market gives investors a chance to invest in the equity of a company.

For example, if an investor buys a bond from a company, they are lending the company money and investing in the credit market. If they buy a stock, they are investing in the equity of a company and essentially buying a share of its profits or assuming a share of its losses. Prevailing interest rates and investor demand are both indicators of the health of the credit market. Analysts also look at the spread between the interest rates on treasury bonds and corporate bonds, including investment-grade bonds and junk bonds.

Credit market

What is the credit market?

Credit market refers to the market through which companies and governments issue debt to investors, such as investment-grade bonds, junk bonds, and short-term commercial paper. Sometimes called the debt market, the credit market also includes debt offerings, such as notes and securitized obligations, including collateralized debt obligations (cdos), mortgage-backed securities, and credit default swaps (CDS).

Key takeaways

The credit market is where investors and institutions can buy debt securities such as bonds.

Issuing debt securities is how governments and corporations raise capital, taking investors money now while paying interest until they pay back the debt principal at maturity.

The credit market is larger than the equity market, so traders look for strength or weakness in the credit market to signal strength or weakness in the economy.

Understanding the credit market

The credit market dwarfs the equity market in terms of dollar value. As such, the state of the credit market acts as an indicator of the relative health of the markets and economy as a whole. Some analysts refer to the credit market as the canary in the mine, because the credit market typically shows signs of distress before the equity market.

The government is the largest issuer of debt, issuing treasury bills, notes and bonds, which have durations to maturity of anywhere from one month to 30 years. Corporations also issue corporate bonds, which make up the second-largest portion of the credit market.

Through corporate bonds, investors lend corporations money they can use to expand their business. In return, the company pays the holder an interest fee and repays the principal at the end of the term. Municipalities and government agencies may issue bonds. These may help fund a city housing project, for example.

Special considerations

Prevailing interest rates and investor demand are both indicators of the health of the credit market. Analysts also look at the spread between the interest rates on treasury bonds and corporate bonds, including investment-grade bonds and junk bonds.

Treasury bonds have the lowest default risk and, thus, the lowest interest rates, while corporate bonds have more default risk and higher interest rates. As the spread between the interest rates on those types of investments increases, it can foreshadow a recession as investors are viewing corporate bonds as increasingly risky.

Types of credit markets

When corporations, national governments, and municipalities need to earn money, they issue bonds. Investors who buy the bonds essentially loan the issuer money. In turn, the issuer pays the investors interest on the bonds, and when the bonds mature, the investors sell them back to the issuers at face value. However, investors may also sell their bonds to other investors for more or less than their face values prior to maturity.

Other parts of the credit market are slightly more complicated, and they consist of consumer debt, such as mortgages, credit cards, and car loans bundled together and sold as an investment. As payments are received on the bundled debt, the buyer earns interest on the security, but if too many borrowers (in the bundled pool) default on their loans, the buyer loses.

Credit market vs. Equity market

While the credit market gives investors a chance to invest in corporate or consumer debt, the equity market gives investors a chance to invest in the equity of a company. For example, if an investor buys a bond from a company, they are lending the company money and investing in the credit market. If they buy a stock, they are investing in the equity of a company and essentially buying a share of its profits or assuming a share of its losses.

Example of credit market

In 2017, apple inc (AAPL) issued $1 billion in bonds that mature in 2027. The bonds pay a coupon of 3%, with payments twice per year. The bond has a $1000 face value, payable at maturity.

An investor looking to receive steady income could buy the bonds—assuming they believe apple will be able to afford the interest payments through to 2027 and pay the face value at maturity. At the time of the issue, apple had a high credit rating. The investor can buy and sell the bonds at any time, as it is not required to hold the bond until maturity.

For the year between april 2018 and april 2019, the bonds had a bond quote that ranged from 92.69 to 99.90. This means that the bondholder could have received the coupon but also seen their bond value increase if they bought at the lower end of the range. People buying near the top of the range would have seen their bonds fall in value but would have still received the coupon.

Bond prices rise and fall due to company-related risk, but mainly because of changes in interest rates in the economy. If interest rates rise, the lower fixed coupon becomes less attractive and the bond price falls. If interest rates decline, the higher fixed coupon becomes more attractive and the bond price rises.

Q&A: A credit trader explains why the best of his breed are a polished, charismatic, tenacious, combination of lawyers, accountants and risk managers

We spoke to a seasoned credit trader about what life is really like in his chosen profession. This is what he told us.

Q: how long have you been a credit trader?

A: I started in credit trading after the bank's graduate analyst 10-week bootcamp (which started a month following the end of my undergraduate degree). All in all, I’ve been trading for 8 years and trading my own book for seven years.

Q: and how did you start out?

I started at the very bottom. My first responsibility was reading research and highlighting salient points, reading and checking documentation, risk analysis. Finally after about 9-months I was allowed to trade in a senior trader's trading book. Having proved myself there, I was given my own trading book 9 months later.

Q: what does it take to get through the graduate recruitment process for credit trading positions?

I experienced some very different graduate recruitment styles at different banks. Fundamentally, you need strong academic credentials and some extracurricular activities which will demonstrate to those reading your application (before you meet) that you aren’t a bore.

Once in the interview you need to demonstrate initiative and some charisma. Anyone applying to an investment bank has intelligence, but I found only a few have the “polish”.

On a final point, to get the role you want you must have tenacity - even if HR try to convince you M&A’s your thing, don’t listen. You need to know the area you want to work in and to push for that.

Q: so what exactly does a credit trader do?

Any trader is a risk manager. But a good credit trader is also part accountant, part lawyer.

He or she must be able to analyze corporate financial statements without relying on research or rating agencies (ratings agencies should simply augment an existing viewpoint or add further details; they should never be relied upon).

Legal knowledge is required to understand the legalese and financial language in bond prospectuses and regulatory rulings.

The legalese and financial language in bond prospectuses and regulatory rulings is where the lawyer part comes in useful.

Q: but.. Can you elaborate further on precisely what the job entails?

Well…the trading element of the role is about judging the credit-worthiness of corporate institutions (companies) or sovereigns (countries). Credit worthiness means the likelihood that they will default and fail to repay their debts.

Once you’ve worked out how likely it is that a company or country will default, you can ‘bet’ or trade on that using all kind of financial instruments. These might include bonds, loans or credit default swaps.

Q: is trading credit more or less interesting than trading equities?

More. Credit is the most heterogeneous of the major financial product types (rates, equities and commodities). There are very few fixed standards and each bond issue has its own terms. These terms cover anything from geographical jurisdictions to what happens in the event of specific outcomes (eg. What happens to the debt if the company issuing it merges with another).

Most bond prospectuses are huge - 200 pages or more. This makes it difficult to immediately calculate what will happen to the repayment of the bond if certain things happen to the issuer. Because of this, credit has a depth that doesn’t exist in other product classes.

Q: so, what happens on a typical day?

I’ll wake up around 05:30 and be in the office by 06:50. As the market is over the counter (OTC) there are no fixed trading hours, although the first stirrings of activity generally starts at 07:30. By this time, we’ll have had a sales and trading meeting with highlights from research and a chance to talk to colleagues in asia. Things get busy around 08:30 and continue until 16.00.

Q: can you quantify busy?

Well, throughout the day I’ll have thousands of bloomberg messages on my screen. I’ll also have messages from our syndicate desk, from other traders in the bank, and requests from sales and clients.

As the day goes on, there will be breaking macro and corporate news that I need to keep up to date with, and ad hoc research being published.

Around midday, the product controllers (kind of accountants) will visit the desk with the previous day’s profit & loss for me to sign-off (or contest).

I generally leave around 6:30 or 7PM, but will stay if there’s work to do.

Q: is there ever any 'fun'?

Once a week there will usually be a client event where someone from sales will wheel me out in the evening to meet clients for three hours or so. There’s also normally be a broker event, which also involves wining and dining, on the interdealer brokers’ tab. Here, you are taken out and wined and dined at their expense while they try to convince you how they can get more and better prices than all their broker competitors.

Q: so, what next? What does a career in credit trading equip you for?

Hmm. That’s a little more challenging. Unlike the universally applicable qualities of a salesperson, traders have very few fields outside of trading. At a stretch, you could perhaps go onto the syndication desk and deal with the actual issuance of the debt, or maybe you could go into counterparty credit risk analysis and work out the likelihood that the companies issuing debt will default.

Generally, however, it’s a choice between working as a credit trader on the buyside (investors and asset managers) and the sellside (in an investment bank).

Q: what about trading your own money in a ‘prop shop’

That's not really an option. Within credit trading the opportunity to work in a prop shop or trading arcade is highly constrained. You need a lot more money upfront than if you’re trading equities.

Q: and, what about the pay?

It’s good. The mean average pay for a salesperson will be higher than a trader but the top traders will be able to far exceed a top salesperson. No one’s going to be making £25k.

Credit trading

For financing needs that conventional products cannot satisfy

Cash and working capital are key to the success of any company. The financing of trade in your company’s lifecycle, whether you’re buying or selling goods, services or commodities, enables you to offer more competitive terms to win business and mitigate payment risk. There are a number of instruments you can use to finance trade flows.

Some of the benefits

Trade finance credit

Extensive african presence

Credit-linked notes

Credit risk analysis

Do you need to enhance your working capital?

Liquidity is an important factor in any business, giving you the ability to quickly convert assets such as investments, accounts receivable, and inventory into cash.

As africa’s dominant provider of credit-based liquidity, our innovative structured credit products are delivered through innovative credit combinations that provide you with access to both african and global asset pools that you could not access independently.

As a leading trader and market-maker in both developed and emerging market cash and derivative products we specialise in enhancing credit yield in customised structures that match your risk-return profiles.

Trade finance credit: one of the biggest challenges faced by companies trading in africa is the gap in trade finance, especially in relation to credit availability.

Managing credit risk: you need to stay on top of business credit risk management by having access to the information you need on market changes.

Credit-linked notes: as with many other credit derivatives, these are used to help manage both your exposure to credit risk and your balance sheet.

Trusted expertise: we understand that you need a banking partner that you can trust. Our expertise in africa and globally, provides you with trusted insights and skills to navigate credit opportunities.

International trade involves buying and selling across countries that have very different financial and legal systems, environments and cultures.

Our unique and extensive presence across the african continent, combined with our proven capabilities and expertise in developed capital markets, provide the insight and skills you need to successfully link emerging and frontier credit opportunities with developed market credit, through transactions that are globally compliant.

African economies are impacted differently by global macroeconomic factors, which necessitates a case-by-case approach when analysing credit risk.

Our in-depth knowledge of discrete african credit markets allows us to access credit on-the-ground.

We have pioneered the structuring of multiple credit linked note programmes, in both ZAR and non-ZAR listed notes, that leverage african and global credit, and we are currently among the top 15 global issuers of credit notes.

Do you need to enhance your working capital?

Liquidity is an important factor in any business, giving you the ability to quickly convert assets such as investments, accounts receivable, and inventory into cash.

Trade finance credit: one of the biggest challenges faced by companies trading in africa is the gap in trade finance, especially in relation to credit availability.

Managing credit risk: you need to stay on top of business credit risk management by having access to the information you need on market changes.

Credit-linked notes: as with many other credit derivatives, these are used to help manage both your exposure to credit risk and your balance sheet.

Trusted expertise: we understand that you need a banking partner that you can trust. Our expertise in africa and globally, provides you with trusted insights and skills to navigate credit opportunities.

International trade involves buying and selling across countries that have very different financial and legal systems, environments and cultures.

African economies are impacted differently by global macroeconomic factors, which necessitates a case-by-case approach when analysing credit risk.

Our in-depth knowledge of discrete african credit markets allows us to access credit on-the-ground.

We have pioneered the structuring of multiple credit linked note programmes, in both ZAR and non-ZAR listed notes, that leverage african and global credit, and we are currently among the top 15 global issuers of credit notes.

Credit trading

Credit trading is the restructuring of the balance sheets of corporate customers through the purchase of the customer's debt and monetary claims. The bank deals in a wide range of types of debt not limited to monetary claims such as loans held by financial institutions (banks and non-banks), but also receivables held by corporations. In addition, we not view the credit trading business simply as the purchase of assets (i.E. Acquisition of monetary claims), but as an opportunity to provide high added-value to the corporate and financial rehabilitation efforts of corporate customers (businesses and sole proprietors) that are facing a variety of challenges. For example, in an economic environment with high volatility where customers are not able to find viable solution to their challenges via traditional routes, and a drastic restructuring is required, shinsei bank meets the needs of its customers through the provision of custom made schemes.

Investment targets

Monetary claims (e.G. Bank borrowing, non-bank financial institutions borrowing, borrowing by a subsidiary from its parent company, etc.)

Account receivables/long-term receivables/account receivables from construction contracts/etc.

Tenant security deposit refund claims (after vacating)

Right to indemnity after fulfillment of guarantee obligations

We maintain close relationships with financial institutions across japan as well as wide-ranging business relationships with major industrial companies. Additionally, we are of a neutral position not associated with any specific group and have a well established track record in the handling of credit trading transactions. We, which is staffed with personnel with a large amount of experience and cutting-edge knowledge in their fields, have taken over the credit trading business to offer our customers the most effective solutions available.

Examples of solutions

Financial restructuring (re-scheduling, debt equity swaps (DES), partial debt forgiveness)

Spin off of unprofitable businesses and subsidiaries (utilizing M&A and corporate splits)

The smooth implementation of restructuring (soft landing)

Shortening of corporate rehabilitation proceedings (such as early collective disposal)

Fundraising support through asset sales

Removal of bonds associated with past business relationships

Restoration of normal transactions with banks (credit creation support)

Provision of loans based upon the value of real estate assets such as loans for real estate purchases, project finance, etc.

Provision of business funds to companies undergoing restructuring including debtor in possession (DIP) finance

Financing for business restructuring by listed companies

We perform a number of integrated functions, including the identification and evaluation of projects, negotiations with customers, preparation of contract documents, administrative operations for assigning debts, and post deal administration. Furthermore, we offer diversified solutions that meet the various needs of our customers such as corporate rehabilitation through the provision of comprehensive services such as loans and M&A made possible collaboration within the shinsei bank group.

Difference between credit trading and rates trading?

Hey, is there a difference between credit trading and rates trading?

I thought they are both just trading bonds?

Rates trading vs. Credit trading?

At a broad level, rates trading has a macro-economic focus looking at economies and interest rates. Credit trading has a micro-economic focus and looks at specific debt securities such as corporate bonds.

What is rates trading?

Interest rates trading revolves around more macro credit products such as government bonds and interest rate swap products. Threse roles will be heavily focused on the yield curve, inflation in different geographies, and monetary policy.

What is an interest rate swap?

An interest rate swap is an agreement between two parties to exchange interest payments to create a marginally lower interest rate payment on both sides. This usually involves exchanging fixed vs. Floating interest rates.

What is credit trading?

As previously mentioned, credit trading is more based on micro analysis such corporate bonds and credit default swaps.

What is a credit default swap?

A credit default swap transfers the credit exposure of a fixed income product between parties. The buyer of the swap makes payments to the seller. This acts like an insurance in the event of a negative credit event - such as default - at which point the seller will pay the buyer a premium.

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Comments ( 27 )

In short. They are not as similar as you'd think. Credit is micro focus while rates is macro. Both fields also have derivatives products that aren't bonds (ie swaps).

Thanks guys, that's clear

IRS? Internal revenue service? What do you trade there?

You are either paying a fixed rate and or receiving a fixed rate. If you are paying a fixed rate, you are receiving LIBOR and hope that rates increase. If you are receiving fixed, you are paying LIBOR and hope that rates fall. There is a lot more to IRS, but that is the general idea.

IRS? Internal revenue service? What do you trade there?

Gracias. I now realise how retarded my post was.

Are the exit opps slightly different for these two. For instance it seems long/short type RV hedge funds would rather hire credit people and global macro hedge funds would rather hire rates people?

Well, credit people would be more likely to go to a debt fund than equity, but yes, rates would be more likely go to global macro funds if they were to leave the sell-side.

Like I said, very different focus in rates vs credit.

To anyone that works in fixed income

Can u comment on choosing between corporate credit and emerging market credit

Trying to decided between the 2 but am leaning toward em as i feel it has a more macro feel than corporates

Can u comment on choosing between corporate credit and emerging market credit

Trying to decided between the 2 but am leaning toward em as i feel it has a more macro feel than corporates

Look up bondarb's (I think it was him) post on EM trading, it was really extensive.

Can u comment on choosing between corporate credit and emerging market credit

Trying to decided between the 2 but am leaning toward em as i feel it has a more macro feel than corporates

If you like to monitor company news and performance,choose equity.If you prefer to monitor economic news (i.E. Unemployment,growth) and mostly interest rates,choose EM.

One of the best posts on WSO .

Rates trading (originally posted: 05/28/2010)

Apologies about being basic but just learning about this stuff but can some explain:

1) what are various subgroups within rates each trader will be separated into trading and which gets what skill sets?

2) can some explain to me what the actual job is like day to day? Walk me through what the role actually is?

3) common interview questions

Q's have already been discussed by a few traders on here. Search a little and you'll find it.

Plenty of sites have the "day in the life of s&t intern". Check out M&I, they have some info.

Thanks for this, i checked that out
but in terms of strengths and interests, can anyone define say what one needs to be good at
on a corporate bond sales desk versus em credit sales (also then em credit at JEF, where fx is not even offered)

Don't know if this is true, but i had heard that many of the corporate bond sales positions have been eliminated in the past 15 years

Query on credit and rates trading (originally posted: 12/22/2006)

1) guide me to some good resources on credit and rates trading

2) throw light on the business prospects of credit and rates trading (whether it is a hot thing in the market/sought after etc)

Rates is a mature market, other than the structured stuff. Credit trading is the 'hotter' market, but the two are quite different. I've worked in both

Re: going into credit trading, would you advise against going into this sort of role given the current environment? Or do you think there'll be a pickup in activity (and bonuses?) once all this mess gets cleaned up (12-18mths?)

What are you looking at in the EM? Are you looking at a liquidity desk or a capial rasing type gig? For markets like the US treasuries these jobs are sometimes sub divided into different groups, not 100% if the ems teams will do this though.

Rates trading position at hedge fund - question (originally posted: 07/13/2011)

Yet another interview for trading position. This time it is for a trading position in rates with a hedge fund. From what I understand, the role will ultimately lead to a position in portfolio management.

Also, what sort of questions should I expect?

Any advice would be highly appreciated.

I would say it strongly depends on the precedent in the fund, on your background. What is your prior experience/education?

My background: tier1 macro fund (soros, tudor, moore, etc)

I can't comment on interview questions specifically, as rates is not my area, however in terms of your other questions, my views are as follows (I know there are some rates traders here who can comment further):

1 - at a junior level, the compensation on the buyside is typically lower - some may disagree, but i've worked in two tier 1 ($15-30bn) hedge funds, and this is always the case, unless you're incredibly lucky or they're incredibly generous.

2 - you may be lucky enough to have a book on the execution desk, where you can punt ideas, or you may also simply find that your job is passing an order from one guy (PM) to the next (sellside sales).

3 - in practice, going from being a senior, risk-taking, sellside trader to a hedge fund PM is far more common than going from execution to PM.

The real answer is that there is no real answer - you may get lucky, join a great fund which trains you well, and turns you into a PM, or you may find yourself stuck in execution. If you can get into a strong IB which has a decent book, that is undoubtedly the lower risk option.

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Credit trading?

Not what you're looking for? Try…

Dont worry its fine.. No1s gona bite your head off here..

(well they mite, but im not)

Credit trading is trading derivatives like CDO's (colateral debt obligations) and CDS (credit default swaps).. Im sure you can type these into wiki/investopedia now and work the rest out

I'll assume you know what trading is.

I'll assume you know what debt is? It is the case that for all debts, there is a credit. That should be enough.

No it isn't. The above is a very specific part of credit trading where the products pay a given amount in a credit event such as default or late payment and the swap element means you handover the defaulted on debt (or credit - same thing, different point of view) which might have some value depending on the debt (or credit) that was held.

A cdo is a bundle of cds products.

All types of trading are fundamentally about the exchange of risk for a price.

Credit risk is a type of risk, namely that some entity will fail to honour its legal obligations. Normally in the context of trading and the financial markets, this would refer to a corporation failing to pay its debts according to the agreed schedule.

Credit trading is the trading of this type of risk. Normally the risk is exchanged in the form of bonds (debt securities), transferrable/assignable loans or derivatives, most commonly the credit default swap.

- credit trading, usually deals with high yield/distressed debt instruments. They used to call it junk bonds in the 80s.
- volume, I would assume it's much less then normal bond trading. I was told that a cash trading desk can have about 3 trades a day, which is nothing!
- credit analysis is important, b/c that affects rating > yields > price
- company and B/S analysis is important too.
- bottom line, buy underpriced debt, with good prospects and sell at higher price later when credit rating improves and hence price.
- derivatives, CDO and CDS. Trading credit risk, both from a hedging point of view and spec.

>> this is my understanding, I don't deal in those products, however if wrong mea culpa!

The term "credit trading" is referred to trading CDS and cash bonds. Cdos, clos, and any other type of structured credit product is normally under "correlation trading". They are two completely different desks, don't mix them up.

It's like mixing a swaps trading desk with an interest rate exotic desk.

I wouldn't think of cdos as correlation trading just because you have to whack in some covariance into your pricing.

I think of correlation trading as the actual trading of correlation/dispersion products - which are broadly, illiquid and sophisticated enough to be on the structured desk in most places but for BNP and socgen where they are about able to get onto flow every now and then provided they have enough flow in the replicating portfolio (var swaps).

They did last year but this year, could be different.

Haha, are you following me? See my other post on whole 'global liquidity crunch' thing.

Wow, short on US homebuilders? No one has been forecasting that at all. If you think that this is the driver of the sub-prime crisis, you're sorely mistaken. This is macroeconomic, depreciation, lack of actualization on rising home prices, poor risk profiles in the form of handing shiit deals to people who can't pay their mortgages. And you have a global liquidity crunch. Remmeber when FI was the place to be? Now, you have people running massively from anything to do with structured finance.

And your bonus will be touched, if not it's more likely that you'll be fired. Don't worry, the vanilla guys may take a look at your CV. Turns out sub-prime helps some chaps more than others.

A reminder that your credit trading job may be eaten by technology

An epochal pandemic aside, credit technologists have had a happy 2020. Credit trading revenues were up 45% year-on-year in the first nine months according to analysis by mckinsey & co. At places like deutsche bank, which rely heavily on credit trading, 2020 investment bank revenues are now predicted to exceed expectations by virtue of fixed income traders' windfall.

However, before credit traders get too attached to the notion that they're indispensable and deserving of very big bonuses, they might want to familiarize themselves with the work of kyle K. Voigt, a banking analyst at KBW.

Voigt says credit traders' days are numbered.

In a note released this week, voigt pointed out that the volume of U.S. Investment grade credit trades executed electronically remains small, but has the potential to rise significantly.

Citing figures from 2018, voigt noted that only 23-24% of total notional volume in the U.S. High grade corporate credit market was executed electronically, up from approximately 16% (including retail) five years before. There is the potential for this to increase to 60% as electronic trading platforms increase their penetration, said voigt.

The electronification of investment grade credit trading is nothing new, but it's worth remembering the exisential threat to trading jobs as human traders pressure for pay rises that reflect this year's bumper revenues. - electronification also explains why mckinsey also found that credit trading headcount has barely shifted in 2020; humans aren't needed to move the dial.

Of course, there are pockets where humans will endure. In high yield and distressed markets, where trades are less liquid and products more complex, electronic systems are far harder to implement. Voigt estimates that only 10% of U.S. High yield trades were implemented electronically in 2018. However, this too was up from 3-4% five years previously.

In the worst case scenario, credit traders and salespeople could go the way of their colleagues in cash equities. Jon butler, goldman's former head of equities trading technology, said that when he arrived at goldman in 2000 there were around 200 people at goldman who were just trading nasdaq stocks. Seven years later, after that market had been automated, butler said there were only a handful left.

Credit traders may have been given a reprieve in 2020. Rising revenues and volatile markets in which some clients want to talk to knowledgeable human beings instead of dealing with electronic systems, have probably discouraged banks from heavily cutting jobs. However, this doesn't change the direction of travel. Nor does it make demanding a huge bonus a very good idea.

Credit spread definition

What is a credit spread for bonds?

In the bond market, a credit spread is the difference in yield between two bonds with similar maturities but different credit ratings. Yield is the return that an investor will receive at the bond’s maturity, while a credit rating denotes the risk of default for that particular bond.

Discover how to trade options

Learn more about options trading and how to get started.

Default risk is important in bond trading, because it represents the likelihood that the bond issuer will fail to repay the value of the bond to the buyer at its maturity. Bond traders and investors can use the credit spread to compare the risk of default with the potential reward of the bond’s yield.

Credit spread formula

The credit spread formula multiplies one minus the recovery rate by the default probability. The full formula is as follows:

The recovery rate enables an investor or trader to estimate the amount of their loan that they would still receive if a bond issuer defaulted on their repayment obligations. Higher recovery rates are always preferable, because a 100% recovery rate means that a borrower will return 100% of the amount that has been lent.

Default probability is the likelihood that a borrower will not be able to meet their obligations to repay a loan over a given time period, which is usually one year. In the bond market, higher-interest bonds usually have a higher probability of default. This means issuers are forced to offer a higher interest rate or yield to entice investors to agree to the increased risk.

What is a credit spread for options?

A credit spread in options trading involves a trader taking a position on options of the same type with the same expiry and underlying asset, but with different strike prices. This is known as a vertical options spread strategy, and it can be used to achieve a credit spread or a debit spread.

A credit spread is a strategy in which the trader is receiving a premium for accepting the obligation to sell or buy at a specific price before expiry. A debit spread is a strategy in which a trader pays a premium for another market participant to take on the obligation to sell or buy their options at a specific strike price before expiry.

Strategies for credit spread options trading

Credit spreads can be either bullish or bearish, and you can use either version depending on whether you think that the underlying market will increase or decrease in value. Below, we’ve given examples of both bullish and bearish credit and debit spreads:

A bull put spread requires the purchase of a lower strike put and the simultaneous sale of a higher strike put. This creates a net credit, which will profit if the underlying increases in value

A bear call spread requires the sale of a low strike price call and the simultaneous purchase of a higher strike call. This will achieve a net credit, which will turn a profit if the underlying decreases in value

A bear put spread requires the purchase of a high strike put and the simultaneous sale of a low strike put in order to achieve a net debit. This will turn a profit if the underlying decreases in value

A bull call spread requires the purchase of a lower strike call and the simultaneous sale of a higher strike call, which will achieve a net debit and result in a profit if the underlying increases in value

Debt capital markets, global syndicate and credit trading

Debt capital markets

The debt capital markets team professionals are focused on the origination and structuring of bond solutions for corporates, financial institutions, sovereigns, supra-nationals and agencies. The team provides issuers with capital structure advisory and liability management. The team's market activities are supplemented by a robust mtns & private placement business globally, including a strong footprint in the US private placement market.

Organisation

Debt capital markets consists of four segments: corporate high grade; financial institutions; sovereigns, supra-nationals and agencies (SSA); and global high yield. The solutions & advisory team provides tailor-made solutions, notably in the area of hybrid capital and liability management. By doing more analysis of client balance-sheet needs, and building expertise in solutions/marketing, this transversal team offers issuer clients a single entry point. This approach makes crédit agricole CIB’s offer more relevant to clients and distinct from its competitors – by embracing a solution-driven approach rather than a product-push model.

The team has professionals in key locations around the world, close to crédit agricole CIB clients. The hubs of debt capital markets are london, new york and hong kong, with offices also located in dubai, paris, madrid, milan, frankfurt, stockholm, singapore, tokyo and seoul.

Presence worldwide

The issuers with whom crédit agricole CIB works range across the credit spectrum, from investment grade to high yield. The bank serves issuers located throughout europe and the united states, as well as in emerging regions such as latin america, the GCC, eastern europe and asia-pacific. Crédit agricole CIB has also been active in australia and japan.

The main working currencies of debt capital markets are EUR and USD.

Global syndicate & credit trading

The credit product line has a global presence, with centres in london, paris, new york, hong kong, tokyo and dubai. It manages the fixed income bond trading syndication and secondary credit trading. The business is run with a worldwide approach by offering its issuing and investing clients, 24-hour coverage.

Its activities extend from government bonds, agencies, investment-grade bonds, high-yield bonds and emerging market securities. It also includes bond syndication and private placement activities forming the basis of the bank's primary market activities. The origination, syndication, sales and trading teams provide high-quality service to their clients worldwide.

An end-to-end bond/credit business

To facilitate an end-to-end bond/credit business, the debt capital market professionals work in close collaboration, using the following sequence of activities: origination > structuring > syndicate > sales > trading – this provides more efficient service to clients and a fully integrated service vis-à-vis issuers and investors.

The integrated service deals in all asset classes on multiple trading venues, and can provide customised solutions to meet the requirements of issuing and investing clients. Trading teams maintain a top 5 dealer ranking in crédit agricole CIB led transactions showing a strong alignment with our primary business.

Crédit agricole CIB's secondary credit offering can be accessed via sales coverage or on electronic platforms via bloomberg, tradeweb, marketaxess and bondvision.

A transparent and real-time bookbuilding platform for new issues

Ebook is an online platform for managing primary market bond issuance process in connection with public syndicated transactions. Syndicate, therefore has a global view of investors, participating in new issues - which is made available in real time and complete transparency to the issuer. From organising roadshows, to collecting and allocating investors' orders, the team provides transparent management of issues by private corporations, public sector entities and financial institutions.

Using this platform, crédit agricole CIB's clients can track the evolution of their order book in real time. The platform offers issuers transparency, speed of execution and the best possible outcome in global syndicated deals.

Origin – a fintech active in the private placement area is endorsed by crédit agricole CIB’s mtns & private placement team to connect with the global issuer community and better match investor reverse enquiries in one simple platform.

Awards & rankings

Crédit agricole CIB’s debt capital markets & global syndicate and credit trading and have built a strong reputation and high standing. As of end of year 2018, the team ranks:

No. 5 in all bonds in EUR (thomson financial)
no. 1 in green, social & sustainability bonds (bloomberg)
no. 4 in agencies in EUR (thomson financial)
no. 2 in all CNY offshore bonds (bloomberg)
no. 3 in 3rd party private emtns – all CCY (dealogic)

so, let's see, what we have: the credit market is where investors buy bonds and other credit-related securities. It is also where governments and corporations raise funds. At credit trading